NEW YORK (CNNMoney.com) -- The massive expansion of requirements for businesses to
file 1099 tax forms that was hidden in the 2,409-page health reform bill took
many by surprise when it came to light last month. But it's just one piece of a
years-long legislative stealth campaign to create ways for the federal
government to track down unreported income.

The result: A blizzard of new tax forms that the Internal Revenue Service
will begin rolling out next year.

"It was actually something that we were following
back under the Bush administration under the 2008 budget -- we started to see
these kinds of rumblings about the 'tax gap' and whether or not businesses were
paying their fair share," says Tom Henschke, president of the Pennsylvania-based
SMC Business Councils, which was one of the first organizations to call attention to the health care
amendment when it was introduced last fall. "So two administrations can claim
credit for this."

The first tax-reporting expansion was buried in a different bill, the Housing
Assistance Tax Act introduced by House Speaker Nancy Pelosi and signed into law
by President George W. Bush in July 2008. Best known for its first-time
homebuyers' credit, the bill also created a new addition to the family of 1099
tax forms: the 1099-K.

The 1099 is a catch-all series of IRS documents used to report non-wage
income from a variety of sources like contract work, dividends, earned interest
and pension distributions. The new 1099-K aims to shine a light on a currently
hard-to-track payment stream: credit cards. Starting in 2011, financial firms
that process credit or debit card payments will be required to send their
clients, and the IRS, an annual form documenting the year's transactions.

The rule comes with a floor to weed out the most casual retailers: The 1099-K
is only required when a merchant has at least 200 payment transactions a year
totaling more than $20,000. But it applies to all payment processors, including
Paypal, Amazon.com, and others that service very small businesses.

The goal of the new regulations is to catch income
that is going unreported to the IRS. The federal government loses an estimated
$300 billion each year from the "tax gap" between what
individuals and businesses owe and what they actually pay.

"Better information reporting helps the tax system
work better by ensuring that everyone pays what they owe," IRS Commissioner Doug
Shulman explained last year as his agency
unveiled the 1099-K. "The new law gives us an important new tool for closing the
tax gap and also provides business taxpayers better documentation to compute and
report their income and expenses."

For companies that currently report all their credit card and Paypal sales to
the IRS, the 1099-K requirement will have little impact. All the paperwork will
be done by the bank or payment processing service, and business owners will
simply receive a form at the end of the year listing their total receipts.

The 1099 changes attached to the health care reform bill are another kettle
of fish. These massively expand the requirements for filing the "1099-Misc"
form, which companies use for recording payments to freelance workers and other
individual service providers. Until now, payments to corporations have been
exempt from 1099 rules, as have payments for the purchase of goods.

Starting in 2012, that changes. All business payments or purchases
that exceed $600 in a calendar year will need to be accompanied by a 1099
filing. That means obtaining the taxpayer ID number of the individual or
corporation you're making the payment to -- even if it's a giant retailer like
Staples or Best Buy -- at the time of the transaction, or else facing IRS
penalties.

In essence, the 1099-Misc is having its role changed from a form for
tracking off-payroll employment to one that must accompany virtually any
sizeable business transaction.

"Just with business travel it would include hotels, rental cars,"
Henschke says. "Phone service: 1099. Computer service: 1099. Whoever does your
postage meter: 1099. You do a little advertising, Yellow Pages: 1099. Your
landlord: 1099. You might as well just keep them in your pocket and hand them
out as you go around every day."

How did this sweeping provision end up hidden in the health reform bill? No
one is willing to take credit for introducing the new legislation, which
appeared in the Senate Finance Committee's version of the health bill last fall.
Committee chairs Don Baucus, D-Mont., and Chuck Grassley, R-Iowa, both referred
calls to committee staffers, who wouldn't comment on the record.

But the provision appears to be a long-in-the-works change that was just
waiting for the right moment to be attached to legislation.

Back in 2007, the Senate Finance Committee asked the
government's General Accountability Office to conduct a tax-gap study. The resulting report estimated that establishing additional
1099 paper trails for income could provide up to $345 billion annually in new federal
tax revenues.

Enter the health reform bill. Last fall, as the debate raged over its
projected cost, Congressional supporters of the bill began a desperate search
for "revenue enhancers" to bring the net cost down -- and eliminating the 1099
exceptions for corporations and goods was seen as an easy way to bring in more
cash without raising tax rates.

House and Senate staffers "essentially have a cupboard full of convenient
revenue raisers that they can put into bills when they need it," notes Chris
Edwards, director of tax policy studies for the libertarian Cato Institute. In
the case of the 1099 changes, he says, "this was sitting around, the IRS wanted
it and had testified in favor of it, and they needed a revenue raiser. This was
just a convenient thing."

Still, the form the new law took was surprising -- especially the requirement
that businesses file 1099s when they purchase goods, which hardly anyone saw
coming.

Henschke's group had previously surveyed its members and learned that they
average 10 filings a year of 1099 forms, each of which takes about half an hour
to prepare. That's in line with the GAO report, which found that a typical small
business spent between three and five hours per year filing 1099s.

But SMC's survey found that extending 1099s just to services purchased from
corporations would push that number to at least 200 filings per year for a
typical small business -- adding an estimated $6,000 to the cost of preparing
the average tax return. And that's without even accounting for the requirement
that 1099s be filed for purchases of goods, a provision that Henschke's group
didn't see coming when it conducted its survey last year.

"These folks are doing their paperwork in the evenings and on the weekends
already," he says. "This certainly adds to the burden substantially."

The IRS has a draft version of the 1099-K form available now for
public feedback, and will begin requiring the form's use next year. The
additional 1099 requirements take effect in 2012. The agency is in the process
of drafting its guidance on them.